Add customers through applications that provide welcome returns

May 4, 2012 By    

Given the challenges the propane industry currently faces in the core home heating market segment, most retail businesses have been forced to adapt one way or another.

Solid opportunities still exist to add highly-profitable new customers. I have chosen three small-gallon, yet proven market demands that you should consider adding and that demonstrate compelling returns – if you are not already in pursuit with urgency today.

Cooking gas – It’s a fact that all chefs and want-to-be chefs prefer gas ranges to electric ranges. If the household is not on natural gas and has someone who likes to cook, propane is a candidate. Think retiring baby boomers. There are 10,000 boomers reaching retirement age every day.

Gas fireplace logs – I know this demand cycles as price moves. A decade ago, with propane at $.99 per gallon, we could not set fireplace logs fast enough. Yet, this lifestyle demand is worthy of continued pursuit.

Water heating – Whether tankless or conventional, water heating is a basic business and, although it competes head-to-head with all of the economic benefits from our electric competitors, propane remains the preferred way to heat water.

Remarkable profitability
While I am aware that these three loads already comprise a portion of your business mix, what you may not know is just how profitable these demands can be. You may have overlooked them as insignificant.

The math in the chart below is overly simplified to make it easier to follow the concepts. We have essentially created two small-gallon account examples that do not include a home heat component. The math is similar to how we examined the home heat rates of return a few columns back.

Returns on Propane Installations
Example A (logs/cooking/water) Example B (cooking)
Tank size – gallons 250 120
Investment – tank and regulator $525 $425
Gallon usage 175 100
Annual rental fee $75 $100
Selling price – cpg (cost per gallon) $3.00 $4.00
Gross margin (gm) – cpg $1.50 $2.50
Less delivery cost – cpg $.50 $.60
Expected return – cpg $1.00 $1.90
Net return on delivery $175 $190
Total return (gm + rental) $250 $290
Annual rate of return 48% 68%

 

Example A involves multiple demands of possibly any combination of water heating, cooking and gas logs. The total investment is $525. The annual lease income is $75. The annual net return after delivery expenses is $175 on the 175 annual delivered gallons. This total annual return of $250 represents just under a 50 percent return on investment.

Example B is a smaller demand – possibly a cooking account or a tankless water heater. The total return of $290 on the $425 investment equates to a 68 percent return on the original investment.

The math makes sense
I should stop at this point and let the math speak for itself. But ask yourself where can you get this type of return – anywhere? In addition, where can you get this type of return that has little risk, a high chance of recurring year after year and has low price sensitivity?

These examples are based on discussions with propane retailers who have begun to adapt to the current economic realities and recognize the incredible rates of return shown here. You can successfully argue the details of my estimates, yet I believe the math behind the returns is solid.

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